Posted on July 12, 2012 by Richard Schwartz
Private foundations to gain comfort from new PRI definitions
US Treasury refines scope of program-related investments.
"The new examples will embolden private foundations to make more
or different program-related investments," says Victoria B.
Bjorklund, partner, founder and head, Exempt Organizations Group,
Simpson Thacher & Bartlett LLP.
Additional examples of program-related investments (PRIs)
contained in proposed regulations from the US Department of the
Treasury will provide private foundations with greater clarity on
how to avoid potential excise tax exposures.
According to Section 4944 of the Internal Revenue Code of 1986,
private foundations are subject to an excise tax if they make
investments that jeopardise their ability to continue their
charitable purposes. PRIs are not treated as 'jeopardising
investments' Additional examples of PRIs could help private
foundations more clearly determine whether or not proposed
investments fit into this category from a tax perspective.
"The new examples will embolden private foundations to make more
or different program-related investments," says Victoria B.
Bjorklund, partner, founder and head, Exempt Organizations Group,
Simpson Thacher & Bartlett LLP. "They authorise particular
kinds or structures of investments that might have made some
private foundations hesitate in the past."
A PRI is defined as an investment that satisfies three
requirements: (1) the primary purpose of the investment is to
further one or more of the foundation's charitable purposes; (2)
neither the production of income nor the appreciation of property
is a significant purpose of the investment; and (3) the investment
is not used for electioneering or lobbying activity.
The proposed regulations supplement the 10 PRI examples provided
in the existing regulations with nine additional examples of
investments that will qualify as PRIs.
They will become effective once they are published as final
regulations in the Federal Register.
A Simpson Thacher memo on the proposed regulations states that
although the proposals only directly apply to private foundations,
public charities that make distributions in the form of charitable
loans and equity investments will also look to these regulations
for guidance to determine whether or not an investment serves a
charitable purpose.